From: Mises Institute
by Patrik Korda
Mises Daily: Tuesday, April 09, 2013 by Patrik Korda
Bitcoin has been all the rage lately. The stuff, or lack thereof,
runs on peer-to-peer technology, is fully decentralized, has no patents,
and is open source. Currently, there are almost 11 million bitcoin
units in existence and the maximum amount of bitcoin units that will
ever be created by the logic of its design are 21 million. For more
details on how they work, see the recent Mises Daily “The Money-Ness of Bitcoins” by economist Nikolay Gertchev.
The Issue
While bitcoins are designed so that they cannot be hyperinflated in
name, they certainly can be hyperinflated in substance. Already, there
are numerous knockoffs such as litecoin, namecoin, and freicoin in
place. This is a particularly valid point because bitcoin is a starfish,
i.e., it is fully decentralized. As stated by Ori Brafman and Rod A.
Beckstrom,
The starfish doesn’t have a head. Its central body isn’t even in charge. In fact, the major organs are replicated throughout each and every arm. If you cut the starfish in half, you’ll be in for a surprise: the animal won’t die, and pretty soon you’ll have two starfish to deal with.[1]
After the music-sharing service Napster went under, Niklas Zennström
(the creator of Skype) stepped in with his creation called Kazaa, which
had no central server that could be shut down. Eventually, such
peer-to-peer programs became more numerous, to include Kazaa Lite,
eDonkey, eMule, BitTorrent, etc. While this may be good news for people
who like to download and share content for free, it certainly is not for
people who are under the impression that bitcoin is a hedge against
inflation. Those who compare bitcoin to a language neglect the fact that
most people do not have an incentive to create a new language out of
the blue. On the other hand, a great chunk of human history consists of
people searching for the philosopher’s stone to magically produce gold.
There can be no doubt that bitcoin has a built-in gold rush mechanism,
which has already spilled over to litecoin and will be sure to spill
over to
subsequent knockoffs as well.[2]
subsequent knockoffs as well.[2]
Money
Does bitcoin jibe with the Austrian stand on money? The only way to find
out is to read what the great Austrians had to say. Let’s start with
Carl Menger. In Principles of Economics, Carl Menger made the
point that money, a general medium of exchange, has always tended to be
the most “saleable” (i.e., “marketable” or “liquid”) commodity of the
time.
What is saleability? It is not simply value. One may have a Picasso at
home, which will fetch quite a sum at a Sotheby’s auction during a boom,
but a Picasso, like a poem by Friedrich Shiller, a work of Sanskrit, or
a decades-old bottle of red wine can never be the most saleable good.
As Menger put it, saleability is the
facility with which [a good] can be disposed of at a market at any convenient time at current purchasing prices, or with less or more diminution of the same. (...) Compare only the number of persons to whom bread and meat can be sold with the number to whom astronomical instruments can be sold.
Menger went on to point out that cattle were the most saleable commodity
in the ancient world. This is perfectly understandable in a world where
bare-bones subsistence is a reality for most people and the structure
of production is virtually nonexistent. As society progressed, however,
cattle became less and less marketable.
As civilization progressed, Menger states that,
… peoples who were led to adopt a copper standard as a result of the material circumstances under which their economy developed, passed on from the less precious metals to the more precious ones, from copper and iron to silver and gold, with the further development of civilization, and especially with the geographical extension of commerce.
Gold won out due to a variety of reasons, such as being durable,
amalgamable, malleable, divisible, homogeneous, and rare. Yet, the
ultimate reason that gold won out is because it was the most saleable of
commodities. As Menger went on to write,
Gold nuggets extracted from the sands of the Aranyos River by a dirty Transylvanian gypsy are just as saleable in his hands as in the hands of the owner of [the] gold mine, provided the gypsy knows where to find the right market for his commodity. Gold nuggets can pass through any number of hands without any decrease whatsoever in marketability. But articles of clothing, bedding, prepared foods, etc., would be suspect and almost unsaleable, or at any rate of greatly depreciated value, in the hands of the gypsy, even if they had not been used by him, and even if he had, from the beginning, acquired them only with the intention of passing them on in exchange.
This leads us to another criticism of bitcoin: It can never be the most
saleable good. The reasoning for this is quite simple. Until the
majority of the 7 billion or so people that inhabit this planet have
either a smart phone or frequent access to the internet, a digital
currency is out of the question.
Gold, on the other hand, is easily recognizable, as opposed to silver
that may be mistaken for other metals such as nickel. Moreover, it melts
at a relatively low temperature and is a relatively soft metal, which
provides superior amalgamation and partly explains why it historically
won out over metals such as platinum. If one questions the role of gold
in the present monetary system, one only has to walk down the street in a
metropolitan area and see a ‘We Buy Gold’ sign. Moreover, central banks
hold gold and lots of it. They do not hold cattle, wheat, soybeans,
copper, silver, or bitcoins.
Menger also wrote,
I am ready to admit that, under highly developed conditions of trade, money is regarded by many economizing men only as a token. But it is quite certain that this illusion would immediately be dispelled if the character of coins as quantities of industrial raw materials
were lost.
[3]
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